(CNN) - President Barack Obama says the federal government is wasting money by paying banks to offer student loans, and wants to cut out what he calls "middlemen" who cost taxpayers billions, and to use the savings to expand other financial aid programs.

"It turns out that right now a lot of the student loan programs are still run through financial institutions and banks. So you got this middleman, and they get billions of dollars per year managing loans that are guaranteed by the federal government," Obama said at a New Hampshire event Tuesday. Obama said those middlemen "are essentially taking no risks, and yet they're still extracting these huge profits."

- The Obama administration says it can provide student loans far cheaper by eliminating the loan subsidies and lending directly to students through the Department of Education. The administration's 2011 budget projects savings of $43 billion over 10 years by getting rid of the subsidized private loans, known as the Federal Family Education Loan program, or "guaranteed" student loan, which provided more than $74 billion to about 15 million students in 2009, according to the Department of Education.
- The program pays banks the difference between the interest they pay on capital and the rates students pay them, currently capped at 6.8 percent.
- The Obama administration says the money it would save by ending the program would be used for other things. Obama has proposed using that money to lend directly to students from the Department of Education, to offer some relief from loan payments for graduates, expand Pell Grants and improve community colleges.
- Erin Dillon, a senior policy analyst at the Washington think-tank Education Sector, told CNN the government "can basically borrow at a much lower cost" than private companies. And since the financial meltdown of 2008, the feds have bought large numbers of loans from struggling private lenders, enlarging the government's share of the market. Dillon says she supports the president's proposal.
- The administration tried the same thing in 2009, and a bill that would enact the plan is pending before the Senate. During debate in the House of Representatives, where it passed in September, Republicans criticized it as a "government takeover" of the student loan industry.
- The administration's estimate is more conservative than the one put out in September by the nonpartisan Congressional Budget Office. The CBO report put the savings from the House-passed bill at at $80 billion, after factoring in a $7 billion cost to the Department of Education to manage student loans itself. An industry-backed alternative that leaves private companies to service government-issued loans would save $67 billion, $13 billion less than the original bill, the CBO reported.
- The Education Department attributes the discrepancy between its projections and the CBOs to differing assumptions about the future of interest rates.

Bottom line: Estimates published by both the administration and Congress suggest that ending the loan subsidies would save several billion dollars a year - but the Obama administration has plans for the money it would save in an education budget that is projected to grow by 6 percent in 2011.

soundoff(31 Responses)

BeverlyinNC

We definitely need to get the banks out of the student loan business. They abuse and take advantage of young people who do not know their rights and then get stuck with huge loan balances they spend half of their career paying off.

Banks can no longer be trusted until they get re-regulated and held accountable for their actions.

Bank of America former CEO was formally indicted by the Justice Dept today for misleading investors and putting the bank on the brink of failure. Proof again that banks will continue unethical behavior until they are forced to go back to being regulated and watched to make sure they never bring our economy to its knees again.

By the way – THANK YOU Harry Reid and Nancy Pelosi for bringing us the Consumer Credit Card Protection Act. I got a notice of my rights from my credit card company today and it was wonderful to see how I no longer have to worry about unethical games to raise my rates and charge me outrageous fees.

Democrats score another one for the PEOPLE!

February 4, 2010 04:47 pm at 4:47 pm |

Bettie

Republican is all about their immediate needs, that is “more money in their pocket” at least give the students a break, always saying "government take over "to scare people. It is sad they are using it to scare people and it is sad people are actually buying it. How is that government taking over when government wants to help student get their education with out being in too much debt? For god sake republican these are the future generation. Yes your kids might not take loans because you are rich enough to pay for them, and that is our money that you use to pay for your kids, when it comes to give back or help others you are thinking government take over. Isn’t that how you guys get paid, republican are selfish and only think of them self and their money what a shame! that is not American way, and the conservative value and racist is the other only ways controlling the other republican who have no money ( tea party) what a sad story.
Obama I hope you will get the support you need to do what you think is right for American people god be with you obama. You rule!

February 4, 2010 04:49 pm at 4:49 pm |

Brian in California

I'm all for putting that money saved from subsidies directly into educational improvements. This is a major problem in this country. When it comes to budget cuts, the first thing that is cut is education. This has happened so much over the years there is nothing left to cut. What's next...charging tuition for public education? College tuition is through the roof because of these cuts. Education assistance is not a government handout, it’s investing in our nation's future and competitiveness in the world. An uneducated populous is a detriment to us all. Just look at the effects....Fox News viewership increases, glenn beck's followers, Sarah Palin, tea partiers, etc. Political beliefs based on emotion and fear rather than evidence and critical thinking.

February 4, 2010 04:50 pm at 4:50 pm |

a little sad

During debate in the House of Representatives, where it passed in September, Republicans criticized it as a "government takeover" of the student loan industry

************************

Does anyone else think that subsidizing education should not be an "industry" to begin with?

February 4, 2010 04:51 pm at 4:51 pm |

The lonely Libertarian of Liverpool NY

Those so called "Middlemen" are private employers. Cutting them will lead to more government growth, more government spending and larger debt.

February 4, 2010 04:54 pm at 4:54 pm |

Anonymous

Despite the noise from the abuser's of this country, I can see that we did elect a smart PRESIDENT.